How Would Jones Act Reform Impact U.S. Shipbuilding?
If the Jones Act were repealed, or its requirement that vessels engaged in domestic waterborne trade be U.S.-built eliminated, what would the impact be on U.S. shipbuilding? Although Jones Act supporters argue the law's repeal would be devastating to U.S. shipyards, such claims should not be taken at face value. An examination of the industry shows not only limited vulnerability to foreign competition but potential upside from liberalization.
Perhaps the most salient fact regarding domestic shipbuilding is that it is largely driven by government contracts unrelated to the Jones Act. Indeed, in 2019 such contracts accounted for nearly 80 percent of industry revenue. Furthermore, of the revenue that does come from the commercial sector, a portion of that is driven by repair and maintenance work not subject to the Jones Act. In other words, the lion's share of U.S. shipbuilding income has nothing to do with the law.
But what would the impact of liberalization be on the commercial shipbuilding that does take place?
By far the most vulnerable market segment would be the construction of large merchant ships. With U.S. shipyards currently charging 4-5 times the world price for such vessels—a disparity that largely reflects the protected industry's inferior efficiency and productivity—they would struggle mightily to compete.
However, two factors should be kept in mind. First, these ships are in many ways already foreign-built. One of the most recent Jones Act ships delivered, for example, the Lurline, was designed in South Korea and much of its key machinery imported from Asia. These ships aren't so much U.S.-built as U.S.-assembled—at frightfully high cost—with much of their value-added coming from elsewhere. Second, there are few such ships being produced. Since 2000 output has averaged a mere three such vessels per year and is set to decline. There's not much shipbuilding left to protect.
So what do U.S. shipyards build? River barges, mostly. From 2015-2020 U.S. shipyards constructed an average of 837 vessels per year, of which 637 (76 percent) were inland tank and dry cargo barges. Another 102 vessels (12 percent) were tugboats with the remainder a smattering of various types ranging from ferries to offshore service vessels.
Interestingly, barge construction is an area of strength for U.S. shipyards. As a 2017 Congressional Research Service report points out, such shipbuilding features both scale economies—hundreds of barges are produced annually—and competitive pressures on the barge industry from alternative forms of transportation. As such, U.S. shipyards should be well-positioned to compete in this market segment.
But there is no reason to think that domestic shipbuilding would be limited to barges and military construction without the Jones Act. If shipbuilders in high-wage European countries such as Norway and the Netherlands can develop competitive niches, why not Americans? Equating an end to Jones Act protectionism with an end to commercial shipbuilding is economic defeatism that denies the ability of Americans to compete. That U.S. firms play leading roles in aerospace (Boeing) and automotive manufacturing (Ford, General Motors)—industries not subject to Jones Act-style domestic build requirements—should be instructive in this regard.
Indeed, there are several reasons to believe that Jones Act liberalization should actually help boost the industry's fortunes:
- Increased ship repair and maintenance needs: Allowing the use of vastly less expensive foreign-built ships would lead to more ships being used in domestic transport. That would increase the need for vessel repair and maintenance services that U.S. shipyards would be geographically primed to capitalize on.
- Access to more competitive inputs: To qualify as U.S.-built, vessels must be entirely assembled in the United States and all “major components of the hull and superstructure” fabricated domestically. This introduces new complexities and costs into domestic shipbuilding. One U.S. shipyard, for example, was found to have used too much steel that was bent overseas (where the technology for doing so is more prevalent) in a $75 million fishing vessel, thus violating the U.S.-built requirement and making it ineligible for use in U.S. waters. Doing away with such requirements would allow for the more competitive sourcing of inputs and lower shipbuilding costs.
- Greater specialization: An inevitable consequence of the Jones Act is reduced specialization among U.S. shipbuilders to the detriment of their productivity. As a Government Accountability Office report points out, major shipbuilders both simultaneously export and import ships. That is to say, they export where they have a comparative advantage and import those vessel types where they are less expert. But that's not the way it works in the United States, where imported ships are forbidden from use in domestic commerce. As a result, U.S. shipbuilders are incentivized to build smaller numbers of a wider range of vessels for a captive domestic market where there is less competition. Repeal of the Jones Act or its U.S.-built requirement would incentivize U.S. shipbuilders toward greater specialization in order to compete internationally.
The idea that Jones Act reform or repeal would spell doom for domestic shipbuilding should be treated with extreme skepticism. Practically speaking, much of U.S. shipbuilding—the sizable majority by revenue—has nothing to with the Jones Act. As for the commercial shipbuilding that does take place, there is little reason to assume that the world's largest and most technologically advanced economy is incapable of carving out its own competitive niche in the global shipbuilding market. Would there be initial rough waters and a difficult adjustment period? Almost certainly. But just as U.S. automakers (and numerous other industries) have ultimately become more productive and efficient due to foreign competition, so too would the country's shipyards.
American shipbuilders and policymakers need to stop running away from competition and instead embrace it.